"No Prejudice" No More: New York and the Death of the No-Prejudice Rule

By Eric Tausend
Hastings Law Journal, Volume 61, Issue 2

I've posted several times about New York's legislative about-face on its "no prejudice rule" for late notice liability coverage disclaimers that took effect in January 2009.  Most of those posts can be found under this blawg's Direct DJ/Late Notice Bill label, and my April 8, 2009, 35-minute webinar on the new law is available for downloading free of charge here.

It may be some time later this year or early next that we'll begin seeing reported New York cases on the new law and its new issues, including the question of when an insured's or claimant's delay in providing required notice can be said to have "materially impair[ed] the ability of the insurer to investigate or defend the claim."  For now, the "old law" late notice cases are running off. 

Last week I received a complimentary copy of Volume 61, Issue 2 of the Hastings Law Journal from third-year law student, Eric Tausend, who finds insurance law fascinating (pleased to see that there are such law students out there) and wrote that issue's excellent Note entitled, "'No-Prejudice' No More:  New York and the Death of the No-Prejudice Rule".  Eric sent me a copy of his Note in appreciation of the information and research materials he was able to cull from this blawg.  Footnotes 121, 131 and 207 mark the  first time, to my knowledge, that Coverage Counsel has been cited in a law review.

Eric's conclusion:

Chapter 388 represents a monumental change for the State of New York. For far too long the state applied a rigid no-prejudice rule when notice to insurers was untimely.  The results of this application were anything but fair. The change in the law is welcome and long overdue; however, it is not without its own issues and shortcomings.

There are likely to be a number of highly litigated provisions in chapter 388. New York courts will have many difficult questions to answer. Beyond that, with regard to certain aspects of the law, the New York Legislature might even need to enact additional legislation to remedy the gaps and problems that were created by chapter 388. But the real importance of this legislation will likely be beyond the borders of New York. As the champion for and advocate of the no-prejudice rule, New York led a minority of jurisdictions in its application. However, without the leadership and support of New York, it is likely that the remaining jurisdictions that apply the no-prejudice rule will soon stop doing so. It will likely take time but, as New York insurance law goes, so goes the country.

Since the no-prejudice rule under pre-2009 policies is in hospice and awaiting death, I won't debate Eric on whether that rule was fair or unfair, instead merely noting that our highest state court, the New York Court of Appeals, had had plenty of opportunities to change or abandon that rule since first pronouncing 38 years ago in Sec. Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 31 NY2d 436 (1972) that "the insurer need not show prejudice before it can assert the defense of noncompliance."  I do agree with Eric, however, that a number of Chapter 388's less than pellucidly clear operative provisions will be litigated extensively in the New York courts.

Thanks for your scholarly and insightful contribution to this subject area, Eric.

Old Policy, Old Law -- CGL Insurer Not Required to Show Prejudice from Insured's Late Notice

CGL – LATE NOTICE – NO PREJUDICE RULE – GOOD FAITH BELIEF IN NONLIABILITY
Ponok Realty Corp. v. United Natl. Specialty Ins. Co.
(2nd Dept., decided 1/5/2010)

Plaintiff, insured landlord, received notice of its tenant's property damage claim more than one year before it notified its CGL insurer, United National Specialty Insurance Company, of that claim.  UNSIC disclaimed liability coverage based on the plaintiff's late notice, and plaintiff commenced this declaratory judgment action for defense and indemnification coverage, arguing: (1) that UNSIC was required to show that plaintiff's delayed reporting prejudiced UNSIC; and (2) that plaintiff's late notice should be excused because it had a good faith belief in nonliability.  Queens Supreme granted UNSIC's motion for summary judgment and plaintiff appealed.

In affirming Supreme Court's order, the Second Department noted that New York's new "prejudice rule" of New York Insurance Law § 3420(c)(2)(A) applies only to policies issued or delivered in New York State on or after January 17, 2009.  The policy in this case was effective from October 2003 to October 2004:

The plaintiff's argument that the "prejudice" rule articulated in Insurance Law § 3420(c)(2)(A), governs this case is unavailing. A 2008 amendment to Insurance Law § 3420(c)(2)(A) (see L 2008, ch 388, § 4) provides that where "an insurer alleges that it was prejudiced as a result of a failure to provide timely notice, the burden shall be on . . . the insurer to prove that it has been prejudiced" if the notice was provided within two years of the time required under the policy (see Insurance Law § 3420[c][2][A][i]). However, it is clear from section 8 of the act amending Insurance Law § 3420 that the amendments were to "apply to policies issued or delivered in this state on or after [January 17, 2009]" (McKinney's Cons Laws of NY, Book 27, Insurance Law § 3420, 2009 Pocket Part, at 15, Historical and Statutory Notes, L 2008, ch 388, § 8; see generally Matter of Auerbach v Board of Educ. of City School Dist. of City of N.Y., 86 NY2d 198, 204). The insurance policy issued by the defendant to the plaintiff was effective from October 3, 2003, until October 3, 2004. Since the policy was issued before the effective date of the relevant amendment to Insurance Law § 3420, the amended version of that section does not apply to the subject insurance policy.

The Second Department also rejected plaintiff's argument that it gave notice of the tenant's claim to UNSIC "as soon as practicable" and found that although the reasonableness of an insured's asserted good faith belief in nonliability generally is a question of fact for the fact-finder, plaintiff in this case had failed to raise a triable issue of fact as to whether its belief that its tenant would not file a claim was reasonable:

In general, the existence of a good faith belief that the injured party would not seek to hold the insured liable, and the reasonableness of such belief, are questions of fact for the fact-finder (see Genova v Regal Mar. Indus., 309 AD2d at 734; C.C.R. Realty of Dutchess v New York Cent. Mut. Fire Ins. Co., 1 AD3d at 305). The burden of demonstrating the reasonableness of the excuse lies with the insured (see Genova v Regal Mar. Indus., 309 AD2d at 734). Nevertheless, summary judgment may be awarded to the insurer if, construing all inferences in favor of the insured, the evidence establishes, as a matter of law, that the insured's belief in nonliability was unreasonable or in bad faith (see 120 Whitehall Realty Assoc., LLC v Hermitage Ins. Co., 40 AD3d at 721; Genova v Regal Mar. Indus., 309 AD2d at 734).

Here, the defendant established its prima facie entitlement to judgment as a matter of law by demonstrating that it was not notified of the subject property damage claim until more than one year had elapsed since the plaintiff received notice of such claim from its tenant (see Great Canal Realty Corp. v Seneca Ins. Co., Inc., 5 NY3d at 743; Sputnik Rest. Corp. v United Natl. Ins. Co., 62 AD3d at 689; 120 Whitehall Realty Assoc., LLC v Hermitage Ins. Co., 40 AD3d at 721; Genova v Regal Mar. Indus., 309 AD2d at 734). In opposition, the plaintiff failed to raise a triable issue of fact as to whether its belief that its tenant would not file a claim was reasonable. In construing all inferences in favor of the insured, the evidence established, as a matter of law, that the plaintiff's belief in nonliability was unreasonable (see 120 Whitehall Realty Assoc., LLC v Hermitage Ins. Co., 40 AD3d at 721; Genova v Regal Mar. Indus., 309 AD2d at 734). Accordingly, the Supreme Court properly granted the defendant's motion for summary judgment.

If I only had a dollar for every time I've seen an appellate court remit a DJ matter back to the motion court for entry of a judgment. Remember folks, declaratory judgment actions end in judgments, not orders.

New York's New Direct DJ/Late Notice/Coverage Disclosure Rules -- Webinooner Recording Available

Yesterday we held our first ever Mura & Storm webinooner on the topic of New York's new direct DJ/late notice/coverage disclosure rules that went into effect on January 17, 2009. For a first effort, I thought the webinar went well. Thank you to those who attended.

If you were unable to join us for that 35-minute webinooner, the audio/video recording of it is available for downloading and re-viewing. The file is approximately 41 MB large and is viewable in Windows Media Player. You may download it free of charge here.

Look on this blog for announcements and a schedule of future Mura & Storm webinooners on other timely insurance coverage topics.

End of an Era -- The Last Hours of New York's No Prejudice Rule

Tomorrow at midnight, New York will join the ranks of other jurisdictions in which liability insurers must prove prejudice from delayed reporting of liability claims. The changes that Chapter 388 of the Laws of 2008 make to New York's Insurance Law take effect tomorrow, January 17, 2009.

WHAT ARE THESE CHANGES?

What changes are those, you ask? Essentially there are three:

1. Direct DJ Actions Allowed: Personal injury or wrongful death plaintiffs may commence and maintain declaratory judgment actions directly against liability insurers that have disclaimed liability or denied coverage based on late notice. Such DJ actions are limited to the question of late notice, and a plaintiff no longer will need to obtain a money judgment against the insured in order to maintain such a DJ action to challenge the insurer's late notice disclaimer.


2. Prejudice Required: The failure to give any required notice within the time period that a policy prescribes will not invalidate any liability coverage claim made by any insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer. In DJ litigation over a late notice disclaimer, "the insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim." Prejudice will be presumed "if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise." If the notice was provided within two years of the loss or occurrence, the burden will be on the insurer to prove that is was prejudiced; if the notice was delayed by more than two years, the burden will be on the insured, injured person or other claimant to prove the insurer was not prejudiced.


3. Disclosure of Liability Coverage & Limits Required: Upon written request, auto and personal liability (homeowners, renters, etc.) insurers will have 60 days to: (1) confirm the existence of liability coverage in effect on the date of the alleged occurrence; and (2) disclose the liability coverage limits of such policies. This new requirement does not apply to excess liability or umbrella policies, whether personal or commercial lines in nature. It also ostensibly does not apply to commercial liability policies, unless they are "used to satisfy a financial responsibility requirement imposed by law of regulation."

WHEN AND HOW DO THESE CHANGES BECOME EFFECTIVE?

When and how do these changes become effective, you ask? In relevant part, Section 8 of the bill states:

This act shall take effect on the one hundred eightieth day after it shall have become a law, and shall apply to policies issued or delivered in this state on or after such date and to any action maintained under such a policy[.]

Tomorrow is Day 180, and this section would seem to limit the entire "act" and its changes to policies "issued or delivered in this state" as of tomorrow, January 17, 2009. Expect there to be some litigation, however, over whether these new rules and requirements -- especially the the direct DJ right and coverage/limits disclosure rule -- apply immediately, even to policies issued or delivered before tomorrow. A strong argument can be made from the language of Section 8 of Chapter 388 that they do not.

The new prejudice requirement is clearly policy language driven, so there shouldn't be much dispute that it will only apply to qualifying policies issued or delivered on and after January 17, 2009. Not the loss date and not the disclaimer date. The policy inception or renewal date. Prejudice will be relevant only to late notice disclaimers of coverage under qualifying liability policies that have an inception or renewal date of January 17, 2009 or later.

To the extent that the new direct DJ right and coverage/limits disclosure requirement are statute driven (CPLR § 3001 and Insurance Law § 3420[d][1]), however, it is likely some will argue that those changes take effect tomorrow and apply regardless of the subject policy's inception or renewal date. I believe the above-quoted language of section 8 of the act indicates otherwise and strongly supports an argument that even those changes apply only to DJ actions brought and coverage requests made under qualifying liability policies issued or delivered on or after January 17, 2009. Liability insurers doing business in New York should consider this issue and choose what effective date and mechanism they will use in responding to direct late notice DJ actions commenced and requests for coverage/limits information received after today.

In determining whether the "new" rules or "old" rules apply, New York liability insurers should first determine the inception or renewal date of the policy under which the claim is made or information is sought. If that date is before Janaury 17, 2009, the "old" rules apply. In cases where these new rules apply, it goes without saying that there will be ample litigation over what constitutes prejudice and when a liability insurer's ability to investigate or defend a claim has been "materially impaired". These new rules do not, however, apply to late notice of first-party property coverage losses and claims. Or to no-fault losses or claims.

HOW WILL THE AMENDED STATUTORY SECTIONS READ?

During this transition period, the websites or services from which you obtain your New York statutory language may include asterisked "effective until..." and "effective..." notes and sections. Here's how the affected statutory sections will read as of tomorrow, January 17, 2009:

CPLR § 3001

§ 3001. Declaratory judgment.
The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed. If the court declines to render such a judgment it shall state its grounds. A party who has brought a claim for personal injury or wrongful death against another party may maintain a declaratory judgment action directly against the insurer of such other party, as provided in paragraph six of subsection (a) of section three thousand four hundred twenty of the insurance law.

INSURANCE LAW § 3420

§ 3420. Liability insurance; standard provisions; right of injured person.

(a) No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors:

(1) A provision that the insolvency or bankruptcy of the person insured, or the insolvency of the insured's estate, shall not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of and within the coverage of such policy or contract.

(2) A provision that in case judgment against the insured or the insured's personal representative in an action brought to recover damages for injury sustained or loss or damage occasioned during the life of the policy or contract shall remain unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the attorney for the insured, or upon the insured, and upon the insurer, then an action may, except during a stay or limited stay of execution against the insured on such judgment, be maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract.

(3) A provision that notice given by or on behalf of the insured, or written notice by or on behalf of the injured person or any other claimant, to any licensed agent of the insurer in this state, with particulars sufficient to identify the insured, shall be deemed notice to the insurer.

(4) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, an injured person or any other claimant if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.

(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer, except as provided in paragraph four of this subsection. With respect to a claims-made policy, however, the policy may provide that the claim shall be made during the policy period, any renewal thereof, or any extended reporting period, except as provided in paragraph four of this subsection. As used in this paragraph, the terms "claims-made policy" and "extended reporting period" shall have their respective meanings as provided in a regulation promulgated by the superintendent.

(6) A provision that, with respect to a claim arising out of death or personal injury of any person, if the insurer disclaims liability or denies coverage based upon the failure to provide timely notice, then the injured person or other claimant may maintain an action directly against such insurer, in which the sole question is the insurer's disclaimer or denial based on the failure to provide timely notice, unless within sixty days following such disclaimer or denial, the insured or the insurer: (A) initiates an action to declare the rights of the parties under the insurance policy; and (B) names the injured person or other claimant as a party to the action.

(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative:

(1) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative, for damages for injury sustained or loss or damage occasioned during the life of the policy or contract;

(2) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative to enforce a right of contribution or indemnity, or any person subrogated to the judgment creditor's rights under such judgment; and

(3) any assignee of a judgment obtained as specified in paragraph one or paragraph two of this subsection, subject further to the limitation contained in section 13-103 of the general obligations law.

(c) (1) If an action is maintained against an insurer under the provisions of paragraph two of subsection (a) of this section and the insurer alleges in defense that the insured failed or refused to cooperate with the insurer in violation of any provision in the policy or contract requiring such cooperation, then the burden shall be upon the insurer to prove such alleged failure or refusal to cooperate.

(2)(A) In any action in which an insurer alleges that it was prejudiced as a result of a failure to provide timely notice, the burden of proof shall be on: (i) the insurer to prove that it has been prejudiced, if the notice was provided within two years of the time required under the policy; or (ii) the insured, injured person or other claimant to prove that the insurer has not been prejudiced, if the notice was provided more than two years after the time required under the policy.
(B) Notwithstanding subparagraph (A) of this paragraph, an irrebuttable presumption of prejudice shall apply if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise.
(C) The insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim.

(d)(1)(A) This paragraph applies with respect to a liability policy that provides coverage with respect to a claim arising out of the death or bodily injury of any person, where the policy is: (i) subject to section three thousand four hundred twenty-five of this article, other than an excess liability or umbrella policy; or (ii) used to satisfy a financial responsibility requirement imposed by law or regulation.
(B) Upon an insurer's receipt of a written request by an injured person who has filed a claim or by another claimant, an insurer shall, within sixty days of receipt of the written request: (i) confirm to the injured person or other claimant in writing whether the insured had a liability insurance policy of the type specified in subparagraph (A) of this paragraph in effect with the insurer on the date of the alleged occurrence; and (ii) specify the liability insurance limits of the coverage provided under the policy.
(C) If the injured person or other claimant fails to provide sufficient identifying information to allow the insurer, in the exercise of reasonable diligence, to identify a liability insurance policy that may be relevant to the claim, the insurer shall within forty-five days of receipt of the written request, so advise the injured person or other claimant in writing and identify for the injured person or other claimant the additional information needed. Within forty-five days of receipt of the additional information, the insurer shall provide the information required under subparagraph (B) of this paragraph.

(2) If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

(e) No policy or contract of personal injury liability insurance or of property damage liability insurance, covering liability arising from the ownership, maintenance or operation of any motor vehicle or of any vehicle as defined in section three hundred eighty-eight of the vehicle and traffic law, or an aircraft, or any vessel as defined in section forty-eight of the navigation law, shall be issued or delivered in this state to the owner thereof, or shall be issued or delivered by any authorized insurer upon any such vehicle or aircraft or vessel then principally garaged or principally used in this state, unless it contains a provision insuring the named insured against liability for death or injury sustained, or loss or damage occasioned within the coverage of the policy or contract, as a result of negligence in the operation or use of such vehicle, aircraft or vessel, as the case may be, by any person operating or using the same with the permission, express or implied, of the named insured.

(f) (1) No policy insuring against loss resulting from liability imposed by law for bodily injury or death suffered by any natural person arising out of the ownership, maintenance and use of a motor vehicle by the insured shall be issued or delivered by any authorized insurer upon any motor vehicle then principally garaged or principally used in this state unless it contains a provision whereby the insurer agrees that it will pay to the insured, as defined in such provision, subject to the terms and conditions set forth therein to be prescribed by the board of directors of the Motor Vehicle Accident Indemnification Corporation and approved by the superintendent, all sums, not exceeding a maximum amount or limit of twenty-five thousand dollars exclusive of interest and costs, on account of injury to and all sums, not exceeding a maximum amount or limit of fifty thousand dollars exclusive of interest and costs, on account of death of one person, in any one accident, and the maximum amount or limit, subject to such limit for any one person so injured of fifty thousand dollars or so killed of one hundred thousand dollars, exclusive of interest and costs, on account of injury to, or death of, more than one person in any one accident, which the insured or his legal representative shall be entitled to recover as damages from an owner or operator of an uninsured motor vehicle, unidentified motor vehicle which leaves the scene of an accident, a motor vehicle registered in this state as to which at the time of the accident there was not in effect a policy of liability insurance, a stolen vehicle, a motor vehicle operated without permission of the owner, an insured motor vehicle where the insurer disclaims liability or denies coverage or an unregistered vehicle because of bodily injury, sickness or disease, including death resulting therefrom, sustained by the insured, caused by accident occurring in this state and arising out of the ownership, maintenance or use of such motor vehicle. No payment for non-economic loss shall be made under such policy provision to a covered person unless such person has incurred a serious injury, as such terms are defined in section five thousand one hundred two of this chapter. Such policy shall not duplicate any element of basic economic loss provided for under article fifty-one of this chapter. No payments of first party benefits for basic economic loss made pursuant to such article shall diminish the obligations of the insurer under this policy provision for the payment of non-economic loss and economic loss in excess of basic economic loss. Notwithstanding any inconsistent provisions of section three thousand four hundred twenty-five of this article, any such policy which does not contain the aforesaid provisions shall be construed as if such provisions were embodied therein.

(2) (A) Any such policy shall, at the option of the insured, also provide supplementary uninsured/underinsured motorists insurance for bodily injury, in an amount up to the bodily injury liability insurance limits of coverage provided under such policy, subject to a maximum of two hundred fifty thousand dollars because of bodily injury to or death of one person in any one accident and, subject to such limit for one person, up to five hundred thousand dollars because of bodily injury to or death of two or more persons in any one accident, or a combined single limit policy of five hundred thousand dollars because of bodily injury to or death of one or more persons in any one accident. Provided however, an insurer issuing such policy, in lieu of offering to the insured the coverages stated above, may provide supplementary uninsured/underinsured motorists insurance for bodily injury, in an amount up to the bodily injury liability insurance limits of coverage provided under such policy, subject to a maximum of one hundred thousand dollars because of bodily injury to or death of one person in any one accident and, subject to such limit for one person, up to three hundred thousand dollars because of bodily injury to or death of two or more persons in any one accident, or a combined single limit policy of three hundred thousand dollars because of bodily injury to or death of one or more persons in any one accident, if such insurer also makes available a personal umbrella policy with liability coverage limits up to at least five hundred thousand dollars which also provides coverage for supplementary uninsured/underinsured motorists claims. Supplementary uninsured/underinsured motorists insurance shall provide coverage, in any state or Canadian province, if the limits of liability under all bodily injury liability bonds and insurance policies of another motor vehicle liable for damages are in a lesser amount than the bodily injury liability insurance limits of coverage provided by such policy. Upon written request by any insured covered by supplemental uninsured/underinsured motorists insurance or his duly authorized representative and upon disclosure by the insured of the insured's bodily injury and supplemental uninsured/underinsured motorists insurance coverage limits, the insurer of any other owner or operator of another motor vehicle against which a claim has been made for damages to the insured shall disclose, within forty-five days of the request, the bodily injury liability insurance limits of its coverage provided under the policy or all bodily injury liability bonds. The time of the insured to make any supplementary uninsured/underinsured motorist claim, shall be tolled during the period the insurer of any other owner or operator of another motor vehicle that may be liable for damages to the insured, fails to so disclose its coverage. As a condition precedent to the obligation of the insurer to pay under the supplementary uninsured/underinsured motorists insurance coverage, the limits of liability of all bodily injury liability bonds or insurance policies applicable at the time of the accident shall be exhausted by payment of judgments or settlements.
(B) In addition to the notice provided, upon issuance of a policy of motor vehicle liability insurance pursuant to regulations promulgated by the superintendent, insurers shall notify insureds, in writing, of the availability of supplementary uninsured/underinsured motorists coverage. Such notification shall contain an explanation of supplementary uninsured/underinsured motorists coverage and the amounts in which it can be purchased. Subsequently, a notification of availability shall be provided at least once a year and may be simplified pursuant to regulations promulgated by the superintendent, but must include a concise statement that supplementary uninsured/underinsured motorists coverage is available, an explanation of such coverage, and the coverage limits that can be purchased from the insurer.

(3) The protection provided by this subsection shall not apply to any cause of action by an insured person arising out of a motor vehicle accident occurring in this state against a person whose identity is unascertainable, unless the bodily injury to the insured person arose out of physical contact of the motor vehicle causing the injury with the insured person or with a motor vehicle which the insured person was occupying (meaning in or upon or entering into or alighting from) at the time of the accident.

(4) An insurer shall give notice to the commissioner of motor vehicles of the entry of any judgment upon which a claim is made against such insurer under this subsection and of the payment or settlement of any claim by the insurer.

(g) No policy or contract shall be deemed to insure against any liability of an insured because of death of or injuries to his or her spouse or because of injury to, or destruction of property of his or her spouse unless express provision relating specifically thereto is included in the policy as provided in paragraphs one and two of this subsection. This exclusion shall apply only where the injured spouse, to be entitled to recover, must prove the culpable conduct of the insured spouse.

(1) Upon written request of an insured, and upon payment of a reasonable premium established in accordance with article twenty-three of this chapter, an insurer issuing or delivering any policy that satisfies the requirements of article six of the vehicle and traffic law shall provide coverage against liability of an insured because of death of or injuries to his or her spouse up to the liability insurance limits provided under such policy even where the injured spouse, to be entitled to recover, must prove the culpable conduct of the insured spouse. Such insurance coverage shall be known as "supplemental spousal liability insurance".

(2) Upon issuanceof a motor vehicle liability policy that satisfies the requirements of article six of the vehicle and traffic law and that becomes effective on or after January first, two thousand three, pursuant to regulations promulgated by the superintendent, the insurer shall notify the insured, in writing, of the availability of supplemental spousal liability insurance. Such notification shall be contained on the front of the premium notice in boldface type and include a concise statement that supplementary spousal coverage is available, an explanation of such coverage, and the insurer's premium for such coverage. Subsequently, a notification of the availability of supplementary spousal liability coverage shall be provided at least once a year in motor vehicle liability policies issued pursuant to article six of the vehicle and traffic law, including those originally issued prior to January first, two thousand three. Such notice must include a concise statement that supplementary spousal coverage is available, an explanation of such coverage, and the insurer's premium for such coverage.

(h) In this section, the term "insurance upon any property or risk located in this state" includes insurance against legal liability arising out of the ownership, operation or maintenance of any vehicle which is principally garaged or principally used in this state, or arising out of the ownership, operation, use or maintenance of any property which is principally kept or principally used in this state, or arising out of any otheractivity which is principally carried on in this state.

(i) Except as provided in subsection (j) of this section, the provisions of this section shall not apply to any policy or contract of insurance in so far as it covers the liability of an employer for workers' compensation, if such contract is governed by the provisions of section fifty-four of the workers' compensation law, or by any similar law of another state, province or country, nor to the kinds of insurances set forth in paragraph three of subsection (b) of section two thousand one hundred seventeen of this chapter.

(j) (1) Notwithstanding any other provision of this chapter or any other law to the contrary, every policy providing comprehensive personal liability insurance on a one, two, three or four family owner-occupied dwelling, issued or delivered in this state on and after the first of March, nineteen eighty-four, shall provide for coverage against liability for the payment of any obligation, which the policyholder may incur pursuant to the provisions of the workers' compensation law, to an employee arising out of and in the course of employment of less than forty hours per week, in and about such residences of the policyholder in this state. Such coverage shall provide for the benefits in the standard workers' compensation policy issued in this state. No one who purchases a policy providing comprehensive personal liability insurance shall be deemed to have elected to cover under the workers' compensation law any employee who is not required, under the provisions of such law, to be covered.

(2) The term "policyholder" as used in this subsection shall be limited to an individual or individuals as defined by the terms of the policy, but shall not include corporate or other business entities or an individual who has or individuals who have in effect a workers' compensation policy which covers employees working in and about his or their residence.

(3) Every insurer who is licensed by the superintendent to issue homeowners or other policies providing comprehensive personal liability insurance in this state shall also be deemed to be licensed to transact workers' compensation insurance for the purpose of covering those persons specified in this subsection.

INSURANCE LAW § 2601(a)

§ 2601. Unfair claim settlement practices; penalties.

(a) No insurer doing business in this state shall engage in unfair claim settlement practices. Any of the following acts by an insurer, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices:

(1) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue;

(2) failing to acknowledge with reasonable promptness pertinent communications as to claims arising under its policies;

(3) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies;

(4) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear, except where there is a reasonable basis supported by specific information available for review by the department that the claimant has caused the loss to occur by arson. After receiving a properly executed proof of loss, the insurer shall advise the claimant of acceptance or denial of the claim within thirty working days;

(5) compelling policyholders to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them; or

(6) failing to promptly disclose coverage pursuant to subdivision (d) or subparagraph (A) of paragraph two of subsection (f) of section three thousand four hundred twenty of this chapter.

Circular Letter No. 26 (2008) -- RE: Notice provisions in liability policies; Chapter 388 of the Laws of 2008

The New York State Insurance Department has issued a slightly revised version of Circular Letter No. 26 (2008) regarding notice provisions in New York liability insurance policies. Click the image to the right to review that circular letter.

The circular letter reminds liability insurers doing business in New York:

The law takes effect on January 17, 2009 (180 days after it was signed by the Governor on July 21, 2008). The amendments apply to all liability policies (including renewals) issued or delivered in New York on or after the effective date of January 17, 2009, including policies issued in the excess line market. Liability insurers are reminded of the necessity of promptly revising their property/casualty insurance policy forms to comply with the bill’s significant amendments.

To see the minor revisions that were made to the draft letter that the Department circulated last month, click here (revisions are highlighted).

We're 58 days away from the January 17, 2009 implementation/effective date. I know URB has had an amendatory endorsement approved. Has anyone seen an approved ISO form yet?

[See my post of January 16, 2009 for a summary of Chapter 388's changes to the New York Insurance Law.]

Draft Circular Letter Re Direct DJ/Late Notice Bill

Just got my hands on a draft circular letter the New York State Insurance Department will be issuing later this month on the Direct DJ/Late Notice Bill you've been reading so much about. Section 8 of that bill mandated that "that effective immediately, the addition, amendment and/or repeal of any rule or regulation necessary for the implementation of this act on its effective date are authorized and directed to be made and completed by the superintendent of insurance on or before such effective date." Guess this circular letter will be the Department's first step in that direction.

Click the image to the right for a complete copy of the draft circular letter.

Comments or questions regarding this draft circular letter should be directed to your company's legislative/regulatory liaison or directly to the NYSID. Or send them to me and I'll relay them to the appropriate person(s). I plan on submitting my comments to the Department.

The draft circular letter reminds insurers doing business in New York:

Please note that the Department expects to receive a large volume of policy form filings to review and approve. In order to ensure timely compliance with the statute, all affected insurers and rate service organizations are advised to submit, as soon as possible, revised policy forms to the Insurance Department for the Superintendent's review and approval.

We're 93 days from implementation/effective date. Has anyone seen any new forms yet?

[See my post of January 16, 2009 for a summary of Chapter 388's changes to the New York Insurance Law.]

CORRECTION: Effective Date of Direct DJ/Late Notice/Prejudice Bill -- January 17, 2009

I received some misinformation from the legislative sponsor's office earlier this week. The New York State Senate's bill search website is today reporting that Governor Paterson actually signed the Direct DJ/Late Notice/Prejudice bill (S.8610/A.11541) on July 21, 2008, making its effective date January 17, 2009 (which is a Saturday), not the 19th.

STATUS:
S8610 DEFRANCISCO Same as A11541 Rules (Weinstein)
Civil Practice Law and Rules
TITLE....Provides for a declaratory judgment action against an insurer directly where a claim is brought for personal injury or wrongful death against another
06/18/08 REFERRED TO RULES
06/23/08 ORDERED TO THIRD READING CAL.2089
06/23/08 PASSED SENATE
06/23/08 DELIVERED TO ASSEMBLY
06/23/08 referred to codes
06/23/08 substituted for a11541
06/23/08 ordered to third reading rules cal.676
06/23/08 passed assembly
06/23/08 returned to senate
07/11/08 DELIVERED TO GOVERNOR
07/21/08 SIGNED CHAP.388

Policies issued, renewed or modified on and after that date must contain the new provisions, and the new rules regarding direct DJ actions, the prejudice requirement, and disclosing liability coverage policy limits will take effect on that date.

For a discussion of the various provisions of that bill, see my Direct DJ/Late Notice Bill label.

Since January 17th is a Saturday and most insurers don't issue, renew or modify policies on weekends, the following Monday the 19th will essentially remain the first business day on which the new law and its provisions for direct DJs, policy requirements, and the obligation to disclose primary policy liability coverage limits will take effect.

[See my post of January 16, 2009 for a summary of Chapter 388's changes to the New York Insurance Law.]

Direct DJ/Late Notice/Prejudice Bill Signed by Governor Paterson

Earlier today (July 23, 2008), Governor Paterson signed the Direct DJ/Late Notice/Prejudice bill (S.8610/A.11541). Its provisions will take effect 180 days from today or on January 17, 2009. Mark your calendars. Policies issued, renewed or modified on and after that date must contain the new provisions, and the new rules regarding direct DJ actions, the prejudice requirement, and disclosing liability coverage policy limits will take effect on that date.

For a discussion of the various provisions of that bill, see my Direct DJ/Late Notice Bill label.

Today's press release on the bills signed is here. No mention of the Intoxication Exclusion Cut Back bill (A10000/S8294-A) being signed. In fact, there's no mention on either the Senate's or Assembly's websites of that bill having even been delivered to the Governor for signature.

Direct DJ/Late Notice/Prejudice Bill Delivered to Governor Paterson for Signature

We're watching. The Direct DJ/Late Notice/Prejudice bill passed by the NYS Legislature last month was delivered to Governor Paterson for signing on July 11, 2008. If/when he signs that bill (which is a certainty), the new provisions will take effect in 180 days from that date. For a discussion of the various provisions of that bill, see my Direct DJ/Late Notice label.

STATUS: S8610 DEFRANCISCO Same as A11541 Rules (Weinstein)
Civil Practice Law and Rules
TITLE....Provides for a declaratory judgment action against an insurer directly where a claim is brought for personal injury or wrongful death against another
06/18/08 REFERRED TO RULES
06/23/08 ORDERED TO THIRD READING CAL.2089
06/23/08 PASSED SENATE
06/23/08 DELIVERED TO ASSEMBLY
06/23/08 referred to codes
06/23/08 substituted for a11541
06/23/08 ordered to third reading rules cal.676
06/23/08 passed assembly
06/23/08 returned to senate
07/11/08 DELIVERED TO GOVERNOR

Intriguing -- Today Governor Paterson signed 38 bills that were delivered to him on the same day as the direct DJ/late notice bill -- July 11th. Bill A11541/S8610 is not listed in the press release as one of those he signed. Program Bill # 65, which became this bill, was conceived under former Governor Spitzer's administration. Could there be any chance that Governor Paterson won't sign this bill? Stay tuned.

No Prejudice Lives in the Property Insurance World

Important point of clarification, thanks to my partner, Scott Storm.

The Direct DJ/Late Notice/Prejudice bill that was just passed on Monday this week applies only to third-party personal injury, wrongful death and property damage claims and New York liability insurance policies that insure against losses comprising those claims. It does not apply to first-party property insurance claims or policies.

What this means is that property insurers should not be bound by the new law and required to prove prejudice (material impairment in "the ability of the insurer to investigate or defend the claim") in order to sustain a late notice disclaimer of a first-party property coverage claim.

This is an important distinction. Insurers that will be amending their policy language to comply with the new law (presuming that it will be signed) should note this distinction and, unless they want to extend the prejudice requirement to first-party coverages, make changes only to liability coverage policy language subject to and mandated by Insurance Law § 3420(a).

STATUS UPDATE (Part IV) -- Direct DJ/Late Notice/Prejudice Bill Passes NYS Legislature on June 23, 2008

As expected, the direct DJ/late notice/prejudice bill has passed and awaits the Governor's signature or veto.

Yesterday, Program Bill #65 passed both houses of the New York State Legislature. The Senate version, Bill # S8610, passed first by a 62-0 vote, and then was delivered to and passed the Assembly, under Bill # A11541, the same day. Since this bill originated from the Governor's Office, expect it to be signed into law.

The new provisions under this bill will take effect 180 days (six months) after the bill becomes law (is signed by the Governor). The new provisions will apply to qualifying policies "issued or delivered in this state on or after [the effective] date and to any action maintained under such a policy[.]"

For an outline and discussion of the provisions of this new law, see my May 14th Status Update (Part II) post.

For a discussion of how the new prejudice rule will work, see my June 14th Prejudice, Presumptions and Burdens of Proof post.

Remember that this new law adds a new paragraph (1) to Insurance Law § 3420(d), which will require certain liability insurers, upon written request by injured persons or other claimants, to confirm the existence and liability coverage limits of qualifying insurance policies. This new requirement will apply to liability policies providing coverage for bodily injury or death, where the policy is: subject to Insurance Law § 3425, other than an excess or liability policy; or used to satisfy a financial responsibility requirement imposed by law or regulation.

Since this bill passed both houses at the end of the Legislature's 2008 session and presumably will be sent to the Governor when the Legislature is out of session, Governor Paterson will have 30 days in which to sign or not sign the bill. A failure to act (not signing the bill) would represent a "pocket veto" and have the same effect as a veto. See, How a Bill Becomes a Law.

Coverage Counsel will report when the Governor signs this bill into law and it becomes effective. Liability insurers doing business in New York should begin preparing for its new provisions, including the requirements for new policy language.

July 23, 2008 -- Governor Paterson signed this bill today. See my post here.

Prejudice, Presumptions, and Burdens of Proof

Not sure whether it is fatalism, pessimism or perhaps legal realism that has me thinking the direct DJ/late notice/prejudice bill is going to pass the NYS Legislature in the next 9 days, but maybe now is a good time to review what liability insurers will need to prove or establish to sustain late notice disclaimers in about 189 days or so. Actually, the new provisions will apply to qualifying policies "issued or delivered in this state on or after [the effective] date and to any action maintained under such a policy[.]"

Not mentioned in any of the alerts, articles or blogs I've read on this bill is the upfront cost that New York liability insurers will necessarily incur in complying with the new law. By adding new subsection 5 to Insurance Law § 3420(a), which mandates the "provision[s]" qualifying New York BI and PD liability policies must contain, the bill will require insurers to amend their policy language, which means new New York amendatory endorsements, notices, mailings, etc. Once the new law takes effect and until new endorsements are in place, of course, existing policies will be deemed to include the new late notice provision.

Prejudice

That provision, pursuant to what will be Insurance Law § 3420(a)(5), will state or provide that a "failure to give any notice required to be given by [this] policy within the time prescribed [here]in shall not invalidate any claim made by any insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced [us] the insurer[.]"

The new law will not explicitly define what is meant by "prejudiced", but does states that in DJ litigation over a late notice disclaimer, "the insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim."

Expect litigation over and court interpretation of what constitutes a "material impairment". The use of the qualifying adverb "materially" probably means that not all impairments will sustain a late notice disclaimer. My vision is impaired, but I can wear contacts or glasses to correct it, so is my impairment material? In other words, how much of an impairment of either an insurer's investigation or defense will be enough to rise to the level of being "material"?

Presumptions

In the "giveth" column vis-à-vis insurers, the new law will provide that an "irrebuttable presumption" -- a/k/a the kind summary judgment motions are made of -- of prejudice "shall apply if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise."

That means pre-notice default judgments and settlements, essentially. I see a potential loophole, or wormhole, however. Homeowners accident. Insured is sued, let's say, 18 months later. Doesn't notify insurer. Plaintiff files/serves default judgment motion. Insurer now gets notice. Contacts plaintiff's counsel to learn of pending default judgment motion. Asks for adjournment of motion to investigate apparent late notice issue. Plaintiff's attorney want to bargain -- concession of coverage for withdrawal of default judgment application. Insurer declines offer. Default judgment taken. Insurer timely disclaims for late notice.

Under that scenario, there arguably would be no "irrebuttable presumption" of prejudice because the insured's liability had not been determined by a court of competent jurisdiction "prior to notice". The insurer would be left to argue that its defense of the claim was "materially impaired" by the delayed notice and, since the notice was less than 2-years delayed, the burden of proving material impairment or prejudice would be on the insurer. Of course, one would think that a default judgment taken after first notice should easily constitute material impairment, but I can envision plaintiffs' counsel arguing that without first testing whether the default judgment can be vacated (which most courts routinely grant on the slimmest of excusable neglect and meritorious defense grounds), the insurer cannot argue that its defense was materially impaired in any sort of permanent way.

Is it meaningful, therefore, that 3420(a)(5) uses the present and not past tense of the verb "impairs"? If a present impairment can be overcome, will or should that negatively impact the insurer's argument of impairment and render it non-material? I don't think so, but I won't get to decide this question. The courts will.

Burdens of Proof

This will be the 2-year rule:

• If the notice is delayed by more than two years, the burden will be on the insured, injured person or other claimant to prove a negative, viz, that the insurer was not prejudiced.
• If the notice was provided within two years, the burden will be on the insurer to prove that it was prejudiced.

New Insurance Law § 3420(c)(2)(A), however, will speak of late notice from "the time required under the policy[.]" Especially in cases of late notice of more than two years in length, expect increased, vigorous litigation over whether facts known to the insured triggered the notice provision in the first place.

I know what's material. The material court decisions will provide for future blogs on this subject after this law goes into effect. Looking forward.

STATUS UPDATE (Part III) -- Direct DJ/Late Notice/Prejudice Bill Released by NYS Governor's Office

Earlier this week, the NYS Governor's Office released Program Bill #65, which is the direct DJ/late notice/prejudice bill discussed in my May 14th post. The most recent version dated June 5, 2008 appears to be identical to the May 7th version, and its provisions are discussed in my Status Update (Part II) blog.

The Governor's memorandum gives the following purpose for this bill:

This bill: (1) permits a party suing an individual in a personal injury or wrongful death case to commence a simultaneous declaratory judgment action against the insurer, in limited circumstances, to challenge the insurer's denial of coverage based on the failure to provide timely notice; and (2) prohibits certain liability insurers from denying coverage for a claim based on the failure to provide timely notice, unless the insurer suffers prejudice as a result of the delayed notice.

As its Statement in Support of the late notice/material prejudice portion of this bill, the Governor's memorandum states:

An insured who files a late notice of claim must demonstrate that it was not reasonably possible to have given such notice within the prescribed time, and that notice of the claim was provided as soon as was reasonably possible. The insurer need not show any prejudice as a result of the late notice in order to disclaim, leaving the burden of proof squarely on the insured. New York is in the minority of states in the country because most states require insurers to suffer some form of prejudice before coverage may properly be denied for late notice. Current law, therefore, leads to an inequitable outcome with insurers collecting billions of dollars in premiums annually, and disclaiming coverage over an inconsequential technicality.

If passed, this bill will become effective 180 days after it becomes law.

The New York State Legislature has only five days left in its 2008 January-June legislative session and given the amount of input the insurance industry already reportedly has had in the drafting of this bill, most expect this bill to be both introduced and passed this month.

June 24, 2008 -- The Governor's Program Bill #65 passed yesterday. See my Status Update (Part IV) post and related posts for details.

STATUS UPDATE (Part II) -- Late Notice/Material Prejudice Bill in New York State

Since posting earlier today, I've acquired and learned (not necessarily the same) some more information.

The Legislative Bill Drafting Commission (LBDC) issued its latest version of the draft DJ/late notice bill on May 7, 2007 and it's viewable here. This version would:

>>> Add language to CPLR § 3001 permitting "a party who has brought a claim for personal injury or wrongful death against another party may maintain a declaratory judgment action directly against the insurer of such other party".

>>> Add to paragraph 4 of Insurance Law § 3420(a) "an injured person" to "the insured" and "any other claimant" as parties whose failure to provide notice as required by a policy would not invalidate their claim "if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter".

>>> Add a new paragraph 5 to Insurance Law § 3420(a) mandating that BI and PD liability policies issued or delivered in New York State contain:

A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer, except as provided in paragraph four of this subsection.

>>> Add a new paragraph 6 to Insurance Law § 3420(a) mandating that BI and PD liability policies issued or delivered in New York State contain:

A provision that, with respect to a claim arising out of death or personal injury of any person, if the insurer disclaims liability or denies coverage based upon the failure to provide timely notice, then the injured person or other claimant may maintain an action directly against such insurer, in which the sole question is the insurer's disclaimer or denial based on the failure to provide timely notice, unless within sixty days following such disclaimer or denial, the insured or the insurer: (A) initiates an action to declare the rights of the parties under the insurance policy; and (B) names the injured person or other claimant as a party to the action.

>>> Add a new paragraph 2 to Insurance Law § 3420(c) providing that:

(2)(A) In any action in which an insurer alleges that it was prejudiced as a result of a failure to provide timely notice, the burden of proof shall be on: (i) the insurer to prove that it has been prejudiced, if the notice was provided within two years of the time required under the policy; or (ii) the insured, injured person or other claimant to prove that the insurer has not been prejudiced, if the notice was provided more than two years after the time required under the policy.

(B) Notwithstanding subparagraph (A) of this paragraph, an irrebuttable presumption of prejudice shall apply if, prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise.

(C) The insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim.

>>> Add a new paragraph (1) to Insurance Law § 3420(d) that, as respects applicable policies, would provide that:

(B) Upon an insurer's receipt of a written request by an injured person who has filed a claim or by another claimant, an insurer shall, within sixty days of receipt of the written request: (i) confirm to the injured person or other claimant in writing whether the insured had a liability insurance policy of the type specified in subparagraph (A) of this paragraph in effect with the insurer on the date of the alleged occurrence; and (ii) specify the liability insurance limits of the coverage provided under the policy.

(C) If the injured person or other claimant fails to provide sufficient identifying information to allow the insurer, in the exercise of reasonable diligence, to identify a liability insurance policy that may be relevant to the claim, the insurer shall within forty-five days of receipt of the written request, so advise the injured person or other claimant in writing and identify for the injured person or other claimant the additional information needed. Within forty-five days of receipt of the additional information, the insurer shall provide the information required under subparagraph (B) of this paragraph.

As you can see, except for the fact that it is limited only to parties who have brought personal injury or death claims, the direct DJ component of this draft bill is similar to S6306 from last year.

"Material prejudice" for S6306, however, has become just plain ol' "prejudice" in this draft bill, defined as that which "materially impairs the ability of the insurer to investigate or defend the claim."

Worth noting is the new section regarding burdens of proving or disproving prejudice: on the insurer to prove if the notice was less than two years late; or on the insured, injured person or other claimant to disprove if the notice was more than two years late.

There would also be a new requirement and procedure for disclosing, upon request, the existence and limits of qualifiying liability insurance policies.

It is my understanding that this draft bill is being reviewed for comments by insurance industry groups as you're reading this. If you have any comments about the draft bill that may be useful to the LBDC, post them here and I'll forward to those who should be able to relay them to the Commission.

June 24, 2008 -- The Governor's Program Bill #65 passed yesterday. See my Status Update (Part IV) post and related posts for details.

STATUS UPDATE -- Late Notice/Material Prejudice Bill in New York State

Here's what I know -- from which you can discern what I don't know.

1. Although there have been a few glancing blows to the coverage defense, New York case law still does not require insurers to show prejudice in order to sustain disclaimers based on late notice of an occurrence or loss.

2. Injured parties may not bring a direct DJ action against the insured defendant's liability insurer to challenge a disclaimer until they get a money judgment against the insured, present it to the insurer, and wait at least 30 days for payment.

Last year, the New York State Legislature passed a bill that would have both required insurers to show "material prejudice" in order to sustain late notice disclaimers and allowed injured parties to commence DJ actions against tortfeasors' insurers before completing their personal injury lawsuits. Senate Bill 6306 was introduced and passed by BOTH houses of the state legislature in a lightning-quick five days last June. That bill:

1. amended New York CPLR § 3001 to permit non-insured declaratory judgment actions to be brought against insurers before that non-insured party has obtained a money judgment against the insurer’s insured, effectively overruling the New York Court of Appeals’ 2004 decision in Hanover v. Lang (3 N.Y.2d 350 [2004]); and

2. converted New York fully into a “prejudice state” for late notice of claim defenses by adding New York Insurance Law § 3451, which would have required insurers to demonstrate “material prejudice” in order to support denials of coverage based on an insured’s failure to give “timely notice of a claim”.

The insurance industry called an offensive foul/charging, and on August 1, 2007, former Governor Eliot Spitzer pocket vetoed that bill, noting in his veto memorandum:

Much of this dispute seems to result from the manner in which this bill was passed. The bill was not introduced until June 17, 2007, and passed both houses just three days [sic] later. Most of the affected parties were unaware that the bill had been introduced, and claim that they had no opportunity to testify at any hearings or otherwise make their views known before the Legislature acted. As a result, there are significant unanswered questions relating to what the actual impact of the bill might be, and the members of the Legislature have not had an opportunity to appropriately balance the views of both sides.

Former Governor Spitzer kept the discussion and debate going, however, by reporting:

As a result, I have instructed my staff and the Superintendent of Insurance to work with both houses, the insurance industry, business groups, consumer advocates, the trial bar and the Office of Court Administration to investigate this issue further and to determine the impact of these provisions on injured parties, on insurance rates, and on court caseloads.

As noted above, this bill's dual goals - streamlining litigation and prohibiting the denial of coverage for mere technicalities - are sound, and hopefully we can enact a new bill that accomplishes these important goals in a manner that protects the interests of claimants, policyholders and insurers alike.

Aside from what I think of our former governor's use of terms like "trial bar" (translation: personal injury plaintiff attorneys) and "mere technicalities" (aka conditions precedent to coverage), we can eventually expect to see a bill introduced, passed and signed in New York State that changes the "no prejudice" rule for insurers and perhaps also creates an immediate and direct DJ action right for non-insureds injured by insureds whose insurers have declined coverage.

Within weeks after that veto, I became aware that at least one New York insurance industry organization was working on drafting its own proposed bill, probably realizing the inevitability of eventual state legislation on these issues and wanting to "get out in front" of these changes. I saw the latest version of that draft bill a week ago, but am not aware that any state legislator has been enlisted to introduce it any time soon.

Currently pending in the New York State Legislature are at least three bills: two Assembly bills, A9059 and A9188; and one Senate bill, S7031. You can search for and review those proposed bills here by selecting "NYS Legislative Bills". A9059 is the Assembly's counterpart to S7031, which, as you can see, was re-introduced on February 29, 2008 and immediately referred to the Senate's Insurance Committee. S7031 addresses only the late notice/prejudice issue, by proposing to add a new section to New York Insurance Law prohibiting insurers from denying coverage based on an insured falure to give timely notice of a claim "unless the insurer can demonstrate that it has suffered substantial prejudice as a result of the delayed notice."

Coverage Counsel will continue to watch the State Legislature for activity on these issues and will report any developments in this blog as they occur.

June 24, 2008 -- The Governor's Program Bill #65 passed yesterday. See my Status Update (Part IV) post and related posts for details.

July 25, 2008 -- Governor Paterson signed this bill on July 21, 2008m , making its provisions effective on January 17, 2009. For a discussion of the various provisions of that bill, see my Direct DJ/Late Notice Bill label.